First Department Parts With Second on Calculation of Overcharges for Rent-Stabilized Apartments
Daniel Wise
New York Law Journal
July 29, 2010
A ruling from the Appellate Division, First Department, on the calculation of rent overcharges on rent-stabilized apartments has put the court at odds with the Second Department.
A 4-1 majority in the First Department ruled on Tuesday that the base upon which a refund must be calculated is the rent actually being paid by the tenant on the date four years prior to the filing of an overcharge lawsuit. Such lawsuits are governed by a four-year statute of limitations.
The Second Department, however, ruled last year that overcharges must be based on all outstanding rent-reduction orders issued by the New York State Division of Housing and Community Renewal without reference to the four-year limitations period.
The two approaches can yield significantly different results. The First Department's ruling overturned two lower court orders that had applied the Second Department's approach.
In one case, the First Department's method could result in a base rent about one-third higher than the Second Department's method. In the other, the difference could add as much as $700 a month to the amount a landlord must return to its tenant.
Writing for the majority in the First Department case, Rich v. East 10th Street Associates, 113867/07, Justice Sheila Abdus-Salaam concluded that two statutory provisions require that overcharges be computed using the rent actually being paid on the first day for which overcharges could be recovered.
The First Department decision appears on page 43 of the print edition of today's Law Journal.
First, she wrote that a statute of limitations provision in Civil Practice Law and Rules (CPLR) 213-a precludes an "examination of the rental history of the housing accommodation prior to the four-year period immediately preceding the commencement of the action."
In addition, she wrote, Rent Stabilization Law (RSL) §26-516(a)(i) states that the base rent for computing overcharges shall be the amount specified by the landlord in its annual rent registration statement filed for the earliest year covered by the limitations period. The Rent Stabilization Law requires landlords to file annual statements setting forth the amount of rent they are charging their tenants, RSL §26-517.
The other members of the majority were Justices David Friedman, John W. Sweeny Jr. and Eugene Nardelli.
The Second Department in Jenkins v. Fieldbridge Associates, 65 AD3d 169, ruled last year that application of the statutory bar on consideration of reduction orders issued before the limitations period would create an "absurd result." Otherwise, the "continuing duty" the Rent Stabilization Law imposes on owners to comply with rent-reduction orders would be nullified, the court said.
The First Department dissenter, Justice Peter Tom, embraced that position, as did the two Manhattan Supreme Court judges: Justice Michael D. Stallman in the Rich case and Justice O. Peter Sherwood in Scott v. Rockaway Pratt, 100469/08. Both appeals were argued on Feb. 16, and the First Department issued a single opinion on them.
Reversing in both cases, Justice Abdus-Salaam wrote that the two Manhattan justices had "run afoul" of statutory provisions that foreclose applying prior rent orders "even where the prior rental history clearly indicated that an unauthorized rent increase had been imposed," quoting from Matter of Hatanaka v. Lynch, 304 AD2d 325 (2003).
"The Legislature clearly recognized that the rent actually charged on the base date may not be the legal regulated rent, but nonetheless imposed a four-year limitations period that deemed the base rent to be the legal rent," Justice Abdus-Salaam concluded.
Justice Tom objected to the majority's approach because it would "encourage unscrupulous property owners to disregard compliance" with rent-reduction orders by, in effect, lifting them after four years.
The facts in the Scott case illustrate the differences between the approaches taken in the First and Second departments.
Christopher Scott moved into his apartment in January 2004, paying a rent of $925 a month. However, an outstanding order issued by the Division of Housing and Community Renewal (DHCR) from 1983 had lowered the rent to $179 a month based on diminished services.
Absent any rent increase credits to which the owner, Rockaway Pratt, was entitled, Justice Sherwood ordered the overcharge to be calculated from a base of $179 a month rather than the $925 a month Mr. Scott had paid at the outset of his lease.Following the Second Department approach, the landlord would be required to return $35,000. Using the First Department methodology, there would no overcharge at all. Justice Sherwood had remanded the case to DHCR to compute any credits due the landlord.
Christopher Schwartz, a lawyer at MFY Legal Services, said there is "a very strong possibility" the agency's client, Mr. Rich, will appeal. The appeal in the First Department was handled by Kristin M. Pauley, a volunteer at MFY from Willkie Farr & Gallagher.
Mr. Scott was represented by Patrick J. Langhenry of the Legal Aid Society,
Steven D. Sidrane of Sidrane & Schwartz-Sidrane in Hewlett, who represented the two landlords, said the First Department's decision "supports the DHCR's longstanding position on review of rent overcharges and points to the faulty underpinnings of the Second Department's position."
Paul N. Gruber, David Cabrera and Marnie R. Kudon, of Borah, Goldstein, Altschuler, Nahins & Goidel, prepared an amicus brief for the Community Housing Improvement Program, an association of small property owners.
"We are pleased that the First Department did not carve out another exception to the four-year rule," Mr. Cabrera said.